MEMORANDUM OPINION GRANTING MOTION TO DISBURSE AND DENYING MOTION TO MODIFY

MARVIN ISGUR, Bankruptcy Judge.

For the reasons set forth below, the Court: (1) grants Debtors' Motion for Order Directing Disbursement of Funds on Hand by the Chapter 13 Trustee ("Motion to Disburse") (docket no. 224); and (2) denies the Motion to Modify filed by Houston Tire & Automotive Company ("Houston Tire") (docket no. 227).

Background

On July 19, 2007, Marvin E. Ezzell and Sadie A. Ezzell ("Debtors") filed for chapter 13 relief. On August 9, 2007, Debtors filed their schedules and their proposed chapter 13 plan (docket nos. 15, 18). On Schedule B, Debtors listed an unliquidated, pre-petition malpractice cause of action against Twelve Oaks Medical Center and its unnamed doctors ("Twelve Oaks Medical Center"). Debtors did not claim any portion of the cause of action as exempt, and declared the value of the cause of action as unknown.

Debtors amended their proposed chapter 13 plan after creditors Fort Bend County, Frost National Bank, and the Internal Revenue Service objected to confirmation of the proposed chapter 13 plan (docket nos. 30, 31, 54, 55). At the November 14, 2007 confirmation hearing, the objecting creditors orally withdrew their objections and Debtor's proposed amended chapter 13 plan was confirmed ("the confirmed plan") (docket no. 59).

During the third year of their five-year chapter 13 plan, Debtors reached a $750,000.00 settlement agreement with Twelve Oaks Medical Center over their medical malpractice cause of action, for which they filed an Application to Compromise Controversy on October 18, 2009 (docket no. 162). No objections were filed to the Application to Compromise Controversy.

On November 10, 2009, the Court approved the compromise (docket no. 196) after a hearing at which unsecured creditor Houston Tire appeared but raised no objection. The Court ordered the balance of the settlement proceeds transferred to the chapter 13 Trustee after payments of certain legal fees and expenses, and $20,000.00 to Debtors (docket no. 178, "Order Awarding Fees, In Quantum Meruit"). The settlement proceeds are more than enough for Debtors to pay the remaining amounts due under the confirmed plan. On November 24, 2009, the Trustee received $467,387.78 in settlement proceeds, but did not apply the funds towards the remaining amounts due under the plan.

The Motion to Disburse

On December 23, 2009, Debtors filed their Motion to Disburse, seeking an order directing the Trustee to pay to creditors the remaining amounts due under the plan, and to pay to Debtors a refund of $396,114.91. $396,114.91 is the balance that would remain if the Trustee made all payments due under the confirmed plan. Accordingly, Debtors allege that they have overpaid that amount under the confirmed plan.

1. Objections

The chapter 13 trustee and unsecured creditors Houston Tire and XL Parts objected to the Motion to Disburse (docket nos. 226, 229, 233). Specifically:

2. Oral Arguments

On January 20, 2010, the Court heard oral arguments on the Motion to Disburse. With respect to the Trustee's objection, the Court finds that § 1325(b)(4)(B) does not control. Section 1325(b)(4)(B) sets forth one of the requirements for plan confirmation. Pursuant to § 1325(b)(4)(B), a debtor must provide for a five-year commitment period for the plan if (i) the chapter 13 trustee or an unsecured creditor objects; and (ii) the debtor has income above the median income for the State. Since no party objected, Debtors were not required to propose a five-year plan.

It is true that Debtors did propose a 60-month plan, which provided that the total of the payments required of Debtors was $123,000.00.

As set forth above, the plan was confirmed—without objection—on November 14, 2007. There is no showing that Debtors engaged in fraudulent or wrongful conduct in obtaining plan confirmation. It is far too late for parties to object to a plan that was confirmed over two years ago. Debtors proposed $123,000.00 in payments and they have now made more than $123,000.00 in payments.

Nothing in the Bankruptcy Code mandates that a debtor must amend a plan based on a change of circumstances. Instead, the Bankruptcy Code allows the chapter 13 trustee or a holder of an allowed unsecured claim to propose a modification. 11 U.S.C. § 1329.

Section 1329 allows plan modification "at any time after confirmation of the plan but before completion of payments under such plan . . . upon request of the debtor, the trustee, or the holder of an allowed unsecured claim. . . ." 11 U.S.C. § 1329(a).

At the time Houston Tire filed its Motion to Modify, the Trustee had long received the settlement proceeds. Based on this fact, Debtors argue that Houston Tire's Motion to Modify was untimely because plan payments were completed. As set forth above, a motion to modify must be filed "before completion of payments under such plan. . . ." 11 U.S.C. § 1329(a). Therefore, Debtors argue that Houston Tire and XL Parts' objections should be overruled.

Houston Tire countered with two arguments. First, they argue that completion of payments occurs only after a trustee completes payments to creditors. If that argument is sustained, then Houston Tire's Motion to Modify was timely filed. Second, and in the alternative, if the Court finds that completion of payments occurs after a debtor completes payments to the trustee, the Court should still find in favor of Houston Tire due to the facts of the case.

Essentially, Houston Tire argues that it was precluded from filing any timely motion to modify due to the sequence in which Debtors acted. About one week before the Debtors filed their Application to Compromise Controversy on October 18, 2009, Debtors launched a series of objections to claims, including one against Houston Tire's unsecured claim for $87,650.10 (docket no. 149). Pursuant to § 1329, only the holder of an allowed unsecured claim may file a motion to modify a confirmed plan. 11 U.S.C. § 1329(a). Because Debtors objected to the allowance of Houston Tire's claim, it was not an allowed claim. 11 U.S.C. § 502(a). As a result of Debtors' pending objection to Houston Tire's claim, Houston Tire no longer held an allowed unsecured claim and lost standing to file a motion to modify pursuant to § 1329(a).

It was not until November 30, 2009 that Debtors and Houston Tire resolved their claim dispute. However, by this time, the Court had already approved the Application to Compromise and the settlement proceeds had been transferred to the Trustee. Accordingly, from the time the Application to Compromise Controversy was filed to its approval by the Court, Houston Tire did not have the opportunity to file a motion to modify. Houston Tire's argument is that Debtors acted in bad faith and should be prohibited from benefiting from a "windfall."

3. Post-Hearing Events

Based on Houston Tire's argument, the Court ordered the parties to submit briefs on how "completion of payments" is defined § 1329 and on the equitable issues raised by Houston Tire.1 All parties complied.

The Court also instructed the parties to submit an agreed order on an amount that would be sufficient to pay all allowed claims fully in the case. Pending resolution of the Motion to Disburse, the Debtors could receive from the Trustee the settlement proceeds over and above that amount that are not in dispute. On February 18, 2010, the parties submitted an agreed order (docket no. 247), which the Court approved (docket no. 249).2 The agreed order provides that the Trustee retain $205,000.00 as a sufficient amount to pay all remaining allowed claims in full, and disburse the remaining amount to Debtors (docket no. 249).

Jurisdiction

The Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334. Venue is proper in this District pursuant to 28 U.S.C. § 1408. This is a core proceeding pursuant to 28 U.S.C. § 157.

Analysis

1. "Completion of payments" under 11 U.S.C. § 1329

Section 1329 provides that:

11 U.S.C. § 1329(a) (emphasis added). "Modification is based on the premise, that during the life of the plan, circumstances may change, and parties should have the ability to modify the plan accordingly." In re Meza, 467 F.3d 874, 877 (5th Cir.2006) (citing In re Taylor, 215 B.R. 882, 883 (Bankr.S.D.Cal.1997)). Though some courts require "an unanticipated, substantial change to occur before permitting such a plan modification," the Fifth Circuit does not require the showing because § 1329's plain language does not impose that requirement. Id.

Meza is a leading case in the Fifth Circuit addressing § 1329. Meza, 467 F.3d at 874. In Meza, a motion to modify was filed by the trustee to include the non-exempt portion of debtors' 2003 federal income tax refund under the plan. Id. at 876. While the motion was pending, debtors paid the full balance of the plan. Id. Therefore, by the time the motion was presented to the bankruptcy court, debtors had paid all payments required under the plan to the trustee. Id. The bankruptcy court ruled, which the district court affirmed, that the modification request was untimely according to the plain language of § 1329 because all plan payments had been made. Id.

On appeal, the Fifth Circuit vacated the ruling, holding that the trustee's motion was timely because it was filed before debtors' payments to the trustee.

Meza, 467 F.3d at 878-79 (internal citations omitted) (emphases original).

In deciding Meza, the Fifth Circuit only held that a motion to modify is not barred if it is filed before a debtor completes payments to the trustee. Id. at 878. It did not examine whether a motion to modify would be barred if it is filed after a debtor completes payments to the trustee but before the trustee completes payments to creditors. See Id.

However, in dicta, the Fifth Circuit provided guidance for the resolution of the "completion of payments" question in this case:

Id. (emphases original). The same principle barring the trustee's motion for modification—protecting the "mandatory nature of the discharge provision"—should also apply to unsecured creditors. Although the trustee does not represent the interests of unsecured creditors per se, unsecured creditors are the principal beneficiaries of at trustee's motion to modify a plan to increase plan payments. Thus, if the unsecured creditors cannot benefit indirectly from a trustee's motion to modify after the trustee has received all payments, the Court sees no reason why an unsecured creditor could directly move to increase payments after the trustee has received all payments. Such a motion would eviscerate the mandatory nature of the discharge provision. Therefore, the Court finds that completion of payments occurs when a debtor completes payments to the trustee.

Houston Tire argues that the Court should find that completion of payments occur when a trustee completes payments to creditors based on a comparison of § 1329 to § 1328. Specifically, § 1328 provides that "after completion by the debtor of all payments under the plan," the court shall grant the debtor a discharge. 11 U.S.C. § 1328(a) (emphasis added). Section 1329(a) only provides that a plan may be modified "before completion of payments under the plan," with no language regarding by whom payments are completed. Id. § 1328(a). Houston Tire bases its argument on the general principle that Congress acts intentionally when it includes or omits particular phrases in statutes.

Though the Court finds Houston Tire's argument noteworthy, the Court finds otherwise for a host of reasons. First, as discussed above, the Fifth Circuit deemed that completion of payments occurs when a debtor completes payments to the trustee based on its analysis, express statements, and case references in Meza. Meza, 467 F.3d at 878.

Second, while there is some disagreement, "it has generally been held that a plan is `complete' when the debtor makes all the payments to the trustee." In re Sounakhene, 249 B.R. 801, 804 (Bankr. S.D.Cal.2000). See also In re Phelps, 149 B.R. 534, 538 (Bankr.N.D.Ill.1993); In re Moss, 91 B.R. 563, 565 (Bankr.C.D.Cal. 1988). Phelps notably explained that:

Phelps, 149 B.R. at 538-39 (internal citations omitted) (emphases original).

Accordingly, because Debtors' settlement proceeds were transferred to the Trustee before Houston Tire filed its Motion to Modify, and the proceeds were sufficient to complete payments under the confirmed plan, the Court finds that Houston Tire's Motion to Modify is barred.

2. Equitable Considerations

Under 11 U.S.C. § 105(a), the Court:

11 U.S.C. § 105(a). Section 105 is "`consistent with the traditional understanding that bankruptcy courts, as courts of equity, have broad authority to modify creditor-debtor relationships.'" Davis v. Davis (In re Davis), 170 F.3d 475, 492 (5th Cir.1999) (citing United States v. Energy Resources, Inc., 495 U.S. 545, 549, 110 S.Ct. 2139, 109 L.Ed.2d 580 (1990)). Section 105(a) is:

Id. (internal citations omitted).

Houston Tire asserts that the Court should prevent an abuse of process by Debtors based on the facts of this case. At first blush, Houston Tire's argument is quite compelling because it appears that Houston Tire was precluded from filing a motion to modify on account of Debtors' objection to its unsecured claim during the time in which the Application to Compromise Controversy was pending. Under § 502, a claim is deemed allowed, unless a party in interest objects. 11 U.S.C. § 502(a). Under § 1329, a plan may be modified by the debtor, the trustee, or the holder of an allowed secured claim. 11 U.S.C. § 1329. Houston Tire was a holder of an allowed secured claim until Debtors objected. As a result, Houston Tire could not file a motion to modify until Debtors' objection was resolved.

Houston Tire also alleges that Debtors waited more than two years to launch a total of 19 objections to claims, including the one held by Houston Tire, so that they could eliminate standing by any of the unsecured creditors to file a motion to modify while the Court considered their Application to Compromise Controversy. Debtors' alleged strategy was to obtain an approval of their settlement and have the settlement proceeds pre-pay the confirmed plan before a motion to modify could be filed. Debtors' alleged objectives were to secure a "windfall" payment from their settlement agreement and to avoid paying unsecured creditors anything. In short, Houston Tire argues that Debtors' actions were taken in bad faith.3

a. Good Faith and Bad Faith

With respect to whether Debtors acted in bad faith, the Court finds it is useful to look at how the Fifth Circuit determines whether a debtor has acted in good faith or bad faith.

With respect to good faith, a totality of the circumstances test is used to determine whether a chapter 13 plan has been proposed in good faith, as required by 11 U.S.C. § 1325(a)(3). Suggs v. Stanley (In re Stanley), 224 Fed.Appx. 343, 346 (5th Cir.2007). Good faith factors include: (1) the reasonableness of the proposed repayment plan; (2) whether the plan shows an attempt to abuse the spirit of the Bankruptcy Code; (3) whether the debtor genuinely intends to effectuate the plan; (4) whether there is any evidence of misrepresentation, unfair manipulation, or other inequities; (5) whether the filing of the case was part of an underlying scheme of fraud with an intent not to pay; (6) whether the plan reflects the debtor's ability to pay; and (7) whether a creditor has objected to the plan. Id. "In applying this test, the bankruptcy court `exacts an examination of all of the facts in order to determine the bona fides of the debtor.'" Id. (citing In re Chaffin, 816 F.2d 1070, 1074 (5th Cir. 1987)).

With respect to bad faith, the Fifth Circuit has held that in the context of requesting leave to amend exemptions pursuant to Federal Rule of Bankruptcy Procedure 1009:

In re Unruh, 265 Fed.Appx. 148, 150 (5th Cir.2008).

b. The Facts of the Case

In light of these guidelines, the Court reviews the entire history of the case to examine whether Debtors acted in bad faith. The facts are as follows:

While it is true that during the time in which Debtors' Application to Compromise Controversy was pending, Houston Tire did not have standing to filing a motion to modify as a result of Debtors' objection to its claim, it is also true that Houston Tire had notice of the $750,000.00 settlement agreement. It was not only foreseeable that the settlement proceeds would be received by the Trustee to pay remaining amounts due under the confirmed plan, but Houston Tire had actual notice of this fact when it was discussed at the November 10, 2009 hearing.

Houston Tire could have protected its interests in 2007 when the original plan was confirmed. For example, it could have demanded that the Court include a provision in the confirmation order that any proceeds from the fully-disclosed lawsuit would be paid to holders of unsecured claims. Houston Tire did not do so.

Suffice it to say that though Houston Tire could not procedurally file a motion to modify pursuant to § 1329 while its claim was in dispute, it had other opportunities to protect its interest even after the 2007 plan was confirmed. For example, Houston Tire could have responded to the Application to Compromise by filing a request for continuance until Debtors' objection to its claim was resolved. Alternatively, Houston Tire could have also requested particular language within the Court's order approving the compromise to delay transfer of the settlement proceeds to the Trustee until its claim dispute was resolved. Moreover, Houston Tire could have proposed a plan modification before the lawsuit was settled. It did not do any of those things.

The Court finds that the sequence in which Debtors filed their objections to claims and subsequently, their Application to Compromise Controversy, while intriguing, was in accordance with notice and hearing requirements under the Bankruptcy Code. There are no time limits for Debtors to file objections to claims. The fact that Debtors waited until the third year of their bankruptcy case to object to claims is not, on its face, evidence of bad faith. Rather, it may simply reflect the reality that Debtors had limited resources to contest claims until they settled their malpractice cause of action. In fact, Debtors' case was set for dismissal due to delinquent payments until they announced their settlement agreement. Therefore, even if Debtors had not "waited" to file claim objections in the case, there would very likely be no material effect on how unsecured creditors behaved. Unsecured creditors would have no incentive to litigate Debtors' objections because under the confirmed plan, they expected to receive 0% on their claims. The incentive to litigate claims for all parties involved, on a practical basis, arose after the appearance of settlement proceeds.

The Court also notes that the objection to Houston Tire's claim was not frivolous. Houston Tire filed a claim for $87,650.10. Debtors objected and the parties settled by allowing the claim only in the amount of $52,500.00, a reduction of 40%. It is difficult to blame Debtors when Houston Tire's claim was apparently overstated.

Furthermore, neither the Trustee nor XL Parts was precluded from filing a motion to modify. If Debtors were engaging in sharp practices, their allegedly devious conduct does not seem well-conceived. Surely, Houston Tire could have encouraged the Trustee or other creditors to propose a modification.

With respect to XL Parts, Debtors settled their claim dispute with XL Parts on the day the compromise was approved. As a result, there was a period of 14 days between the time XL Parts regained its standing as a holder of an allowed unsecured claim and the time the settlement proceeds were transferred to the Trustee. XL Parts had a total of 14 days to timely file a motion to modify under § 1329, but it did not. Debtors' dealings with XL Parts highlight that Debtors did not act in bad faith.

With respect to the Trustee, there was never a time period prior to November 24, 2009 when he was precluded from filing his own proposed modification in accordance with Meza.

The case to which Houston Tire cites for its request for relief is McCarthy. In re McCarthy, 391 B.R. 372 (Bankr.N.D.Tex. 2008). McCarthy states:

Id. at 375-76. As discussed above, the facts of this case show that Debtors did not act in bad faith or were fraudulent. Accordingly, the Court declines to exercise its equitable powers under § 105.

3. The Trustee's Administration of "Estate Assets"

In his brief, the Trustee asserts, which XL Parts supports, that the settlement proceeds are property of the estate and should be administered for the benefit of creditors. The Trustee's position is that a plan modification is never necessary to administer any estate assets. The Trustee relies on three provisions of the confirmed plan, which is based on the official form of the Southern District of Texas, to advance his position.

First, paragraph 1, entitled "Payments," requires that "debtors . . . submit all or such portion of their future earnings or other future income to the supervision and control of the chapter 13 Trustee. . . ." Second, paragraph 10, entitled "Unsecured Claims," provides that "[u]nsecured creditors not entitled to priority shall comprise a single class of creditors, and those whose claims are allowed, shall be paid a pro rata share of the amount remaining after payment of all secured, priority, and specially classified unsecured claims." Finally, paragraph 15 states that "[t]here are no addenda or other changes made to the official form."

Construing these three provisions together, the Trustee argues that: (1) the settlement proceeds were property of the estate; (2) the payment provision in paragraph 1 contemplates the exact situation at hand, which is for future income to be submitted to the Trustee; (3) pursuant to paragraph 10, unsecured creditors are to be paid a pro rata share of the amount "remaining" after payment of the above-listed claims; and (4) because the settlement funds on hand are sufficient to pay all allowed claims in full, the "amount" remaining after payment of the above-listed claims would be more than adequate to result in 100% payment on allowed unsecured claims by the Trustee. Furthermore, it has been the Trustee's ordinary course of practice to administer such "windfalls," or to distribute such "amounts" remaining regardless of the source of payments, for the benefit of creditors, without noting whether a confirmed plan provides for such distributions.

The Court is alarmed by such a reading of the confirmed plan. Such a loose reading ignores the entirety of sentence 1 of paragraph 1, which conditions the Trustee's supervision and control of funds on what "is necessary for the execution of the plan." The terms of the plan are subsequently set forth in paragraph 1 by amount, frequency, and duration of payments as well as by the grand total of payments. Such terms are not for "mere convenience," as the Trustee states, but rather, are binding on creditors. "The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan." 11 U.S.C. § 1327(a). See e.g., Meza, 467 F.3d at 877 (holding that a confirmed chapter 13 plan is binding on all parties under 11 U.S.C. § 1327(a); however, the plan may be modified pursuant to 11 U.S.C. § 1329).

The Trustee is bound to administer the assets in accordance with the confirmed plan:

EconoLube N' Tune, Inc. v. Frausto (In re Frausto), 259 B.R. 201, 210 (Bankr. N.D.Ala.2000) (emphasis added). Although the Court believes that a Court order or a confirmed plan could vest additional authority in a chapter 13 trustee, no such order or provision exists in this case. The Court overrules the Trustee's arguments.

Conclusion

Because the Court has found that Debtors have not acted in bad faith or otherwise abused the bankruptcy process, the Court grants Debtors' Motion to Disburse. Houston Tire's Motion to Modify is time-barred, and therefore, denied. A separate order will be issued.